China Is Better Able To Withstand A Trade War Than In The Past

A Chinese worker looks on as a cargo ship is loaded at a port in Qingdao, in eastern China's Shandong province, in July 2017. The United States is China's biggest single export market.

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Originally published on July 12, 2018 11:24 am

As President Trump threatens to heap more tariffs on Chinese imports, he's got one important fact on his side: The United States remains China's biggest single export market, buying some $500 billion in goods last year alone.

But China is less dependent on the American market than it was even a decade ago and in some ways is better able to withstand a trade war than the United States.

"The question is less whether we can do harm to them than, which one can endure the pain the better? And there are some reasons to believe that over the short term, the Chinese are better positioned to manage this," says Robert Ross, a professor of political science at Boston College and an expert on U.S.-China relations.

China grew into an economic superpower by becoming a major exporter, rapidly developing a large and highly efficient manufacturing base that enabled it to sell cheap products all over the world.

"We built China," President Trump boasted during a recent appearance in South Carolina.

But China has been steadily diversifying its economy, in ways that make it less vulnerable to U.S. pressure than it once was.

"China's economy is much less dependent on trade now and on trade with the U.S. than it used to be," says Linda Lim, professor of corporate strategy and international business at the University of Michigan.

"Trade is around 20 percent of China's economy," she says. "Ten years ago, it was 40 percent."

At the same time, U.S. companies like Boeing, General Motors and Apple now make plenty of money in China's vast consumer market, giving Beijing leverage over the U.S. economy that it once lacked.

Chinese bureaucrats could make life very difficult for these companies if they chose to, Ross says.

"All these various industries can develop problems in China," he says. "There can be health hazards at a McDonald's. Starbucks could all of a sudden come under investigation for profit issues and tax issues."

To be sure, the United States can exert pain over Chinese companies, too.

But the top-down nature of its economy gives Beijing weapons that Washington lacks. Unlike Trump, Chinese leader Xi Jinping doesn't need to worry about midterms or congressional oversight when he acts.

Many Chinese companies can count on government subsidies to tide them over when things get rough and don't face the same pressure from shareholders to turn a profit every quarter, Lim says.

"If you don't have to make money, that's a huge competitive advantage. So they can absorb the cost" of a trade war, she says.

That's not to say that China is eager for a trade war or can afford to be indifferent to its consequences, says David Dollar, who was the U.S. Treasury Department's financial emissary to China during the Obama administration.

"I would say it's a serious short-term problem for the Chinese and not so big a problem in the medium to long term," Dollar says.

China's $500 billion in exports to the United States are equal to about 4 percent of its gross domestic product, and losing even half of that would be a blow. But China can gradually replace it by exporting to other countries, something it has been doing for years anyway.

In fact, a trade war would only accelerate a process already underway in China of becoming more self-sufficient economically, Lim says.

"China wants to become more independent technologically and less dependent on foreign imports of high-tech products in particular, semiconductors and the like, which it gets from the U.S. and elsewhere," she says.

"So it's perverse. You reinforce their determination to be less dependent on you," Lim says.

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NOEL KING, HOST:

Beijing says it will retaliate if President Trump goes ahead with plans to impose tariffs on more Chinese products. The U.S. and China are locked in what could become a full-on trade war. And China's economy is better positioned than it once was to survive. NPR's Jim Zarroli has the story.

JIM ZARROLI, BYLINE: President Trump holds a view of China that a lot of Americans have. He says, for too long, it's been able to flood U.S. markets with cheap imports. And as a result, it's amassed lots of money, which has helped turn it into an economic superpower.

(SOUNDBITE OF ARCHIVED RECORDING)

PRESIDENT DONALD TRUMP: China made - anywhere, depending on the way you count - from $375 billion, we built China.

ZARROLI: It's true that China has sold a lot of products to the U.S. over the years, and it still does. The U.S. remains China's most important single market, buying $500 billion in goods last year. David Dollar, who worked on trade negotiations with China in the Obama Treasury Department, says losing access to that market would take a bite out of China's economy.

DAVID DOLLAR: For any economy to go down by 2 or 3 percentage points, that's a serious issue.

ZARROLI: And the impact would be especially serious right now because China's economy is already slowing. At the same time, Dollar says, the pain wouldn't be as bad as it once might have been.

DOLLAR: The U.S. market is very important to China, but it's less important than it was 10 years ago.

ZARROLI: For one thing, the Chinese economy has become a lot bigger and more diversified than it once was and less dependent on trade. And China now has leverage of its own against the U.S. Companies such as Apple and Boeing make big money in China. And Boston College political science professor Robert Ross says the Chinese bureaucracy can make life difficult for them if it wants.

ROBERT ROSS: All these various industries can develop problems in China. There can be health hazards at a McDonald's. Starbucks could all of a sudden come under investigation for profit issues and tax issues.

ZARROLI: China can even discourage its consumers from buying American products. Whether it would go that far is still an open question. But Ross says, if worse comes to worst, China may be better able to survive a trade war than the U.S.

ROSS: The question less is whether we can do harm to them than which one can endure the pain the better? And there are some reasons to believe that, over the short term, the Chinese are better positioned to manage this.

ZARROLI: It can do that partly because of its top-down economy. If its growth suffers, Beijing can take steps like cutting taxes or stimulating spending without having to run it by Congress. No one has to worry about midterms. Economist Linda Lim at the University of Michigan says many of China's most important companies are government subsidized, and they don't have shareholders breathing down their necks.

LINDA LIM: If you don't have to make money, that's a huge competitive advantage. So they can absorb the costs.

ZARROLI: Lim points out that China has been gradually trying to become a more independent economy, to strengthen its tech and defense industries. Ironically, she says, a trade war would accelerate the process, even if China has to suffer through some pain to get there. Jim Zarroli, NPR News, New York. Transcript provided by NPR, Copyright NPR.